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Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

There are many things to like about China Life Insurance Co., but helping President Xi Jinping build a new aircraft carrier isn't one of them.

Under the guise of state-owned-enterprise reform, China Shipbuilding Industry Co. said on Friday it plans to buy the stakes it doesn't already own in two subsidiaries via a 22 billion yuan ($3.3 billion) share swap. The transaction will bring in bad-debt manager China Cinda Asset Management Co. and China Life as investors, the latter subscribing for 2 billion yuan of stock in shipbuilding units in Dalian and Wuhan.

Bloody Waters
China Shipbuilding remains in the red despite China's push into aircraft carriers
Source: Bloomberg

China Shipbuilding says recapitalizing the two units will unleash their hidden value, considering their status as "world renowned" marine equipment manufacturers responsible for the nation's aircraft carriers and destroyers. The main selling point here is the operations' military value.

But does China Life really know what it's buying into?

China Shipbuilding doesn't disclose the revenue or profit it earns from the navy because military trade is a state secret. A look at the company's financials, however, shows it can't be that large. Gross profit margins in the second quarter rose just 1.32 percentage points to 9.3 percent. Total revenue fell 38 percent from a year earlier, due to declines in the less-profitable civilian segment -- think businesses such as Hyundai Heavy Industries Co. and Mitsubishi Heavy Industries Ltd.

China Life's own earnings couldn't look more different. In the nine months through September, net profit almost doubled to 27 billion yuan, buoyed by a recovery in the nation's stock market.

Bull Phase
China Life's investment income surged in the third quarter as the nation's stock market recovered
Source: Bloomberg

Life insurers in China are also benefiting from soaring bond yields. It means they don't need to put as much away in cash reserves to cover long-term policy liabilities. In the three months through Sept. 30, China Life tipped 4.6 billion yuan into its reserve bucket versus 13 billion yuan in the first half.

Bounce Back
China 10-year bond yields are at their highest since 2014, a boon for life-insurance companies
Source: Bloomberg
Note: China's life insurers use the 750-day moving average of 10-year bond yields to decide how much to set aside in reserves.

This China Shipbuilding deal is simply another case of a state-owned cash cow being enlisted for national service. I said back in August that China Life has a much safer investment portfolio than rival Ping An Insurance Group Co. But what's the point of crafting a safe house when the government can chip away at it?

Perhaps that's why China Life in its latest financial filing revealed it's been actively engaged in alternative investment projects. According to Daiwa Capital Markets, the group increased its allocation to long-term fixed income assets during the third quarter, boosting non-standard assets with an average maturity of more than 10 years by 40 billion yuan.

If there's one lesson to be learned here it's this: State-owned enterprises should deploy their cash quickly before cap-in-hand Xi comes knocking.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net